Real estate property price trend in Toronto

Updated January 9, 2014

2013 was yet another year of unfulfilled predictions of a collapsing real estate market in Toronto. The media expected balanced market in 2011, and that did not happen. The predictions for 2012 of inevitable drop in real estate prices did not materialize, although, after a frenzied market in the first five months the activity slowed down, mainly due to the tightening of the mortgage lending guidelines.

First quarter of 2013 was still slow, with a decline in the number of sales on a year-over-year basis. That decline continued into the second quarter, but to a much lesser extent. The activity took off in July, and the remaining months brought enough sales to result in a 2% growth of the number of sales in 2013 in comparison to 2012, despite slow first half of the year.

Average property price in the GTA was $523,036 - a 5.2% growth in comparison to 2012 average price of $497,130. We are expecting tight market conditions to contribute to a growth in the average selling price in 2014 by more than the rate of inflation.

In December, in the GTA, Toronto Real Estate Board reported a 13.8% increase in sales, 13.8% decrease in active listings, and 8.9% increase in average price (all in comparison to the same time in 2012). But in the City of Toronto the price increases were considerably higher for the low rise houses - price of detached houses increased by 18.9%, semi-detached by 15.9%, and townhouses by 13.4%. Condo apartment prices also increased, although less, by 7.6%.

Several factors affect our real estate market.

  1. The interest rates increased, but remain still low when looking from a historical perspective, keeping the real cost of purchasing a house, townhouse, condo apartment or loft reasonable, at least for the length of the mortgage term. The recent increases have neither dampened the activity down in any significant way, nor remarkably reduced affordability.
  2. Change in mortgage lending rules in the second half of last year reduced the amount of loan for which the first time buyers with low down payment would qualify,
  3. Properties selling for over 1 million no longer qualify for government insured mortgage, and
  4. Young people, immigrants, and foreign investors are still fuelling the demand, while older generation stays longer in their homes.

 

Toronto real estate market conditions, monthly average price comparison and report on sales above asking price

The province imposed a freeze on urban boundary expansions, which means that land prices are bound to increase. Increased land values lead to an increase in property prices. Increases in single family development charges in the City of Toronto will increase the cost of newly constructed housing, which is already suffering from the higher materials and energy costs. New Toronto Land Transfer Tax was introduced in 2009, and Harmonized Sales Tax came into effect in July of 2012. The later does not have a great impact on purchases of resale homes, other than adding to the closing costs, but will be felt by buyers of new construction.

Real estate remains a sound investment. In the last 18 years, since the end of March 1996 (the lowest point in the recent years) the average value of a house in Toronto rose by approximately 164 percent. In contrast, the increase in average house price in just 5 years between 1984 and 1989 was an astonishing 175 percent. Houses were often re-sold several times, each time selling for a higher price. Such frenzied market had to burn itself out. If we take into account inflation, average house prices increased only 18.2% from the 1989 level.

Using average house prices on record since 1953, corrected for inflation (for comparison purposes we brought the historical data up to today's equivalent values), we produced the following graph. The average prices are courtesy of TREB.

As you may see on the graph, during this time span there were two significant 'spikes' in house prices, and three 'dips'. Red line denotes the trend. Each time the average prices rose above the trend line a 'correction' ensued. We can see that correction on the graph below as a result of late 2008 and early 2009 market conditions. The rate of price gains since 2008 is a bit lower that the one which led to the 1974 correction, and that correction was significantly milder than the 'bubble burst' of 1989, but led to a 10-year period of stable prices, especially when these prices were corrected for inflation.

Average real estate prices since 1953 in Toronto, Canada, corrected for inflation

At the beginning of 2006, when the average house price reached $333,852 (which, corrected for inflation, amounts to $381,279), the price line has crossed over the trend line. But the increase rate was moderate. The brief correction which happened in 2007 - 2008 was more of levelling off the prices, similar to the period between 1957 and 1960. After that brief correction the prices continued to rise, and the increases were quite substantial since 2010. These increases, however, are still not as steep as those of the period between 1985 and 1989.

When the prices rise faster than the trend suggests, the market eventually slows down. Whether the prices become stable, following the trend line, or actually drop, seems to depend on the speed with which the price increases happen. The steeper the angle of the curve representing house prices, the more likely is a price 'correction'.

Price increases since 1996 were much more gradual that in the period between 1985 and 1989, and follow a gentler curve than the ones leading to the past two peaks of 1974 and 1989. Although the angle of the average price line is steeper now than it has been since 1996, it is still gentler than during these two peaks that led to the 'bubble burst'.

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Marisha Robinsky & Ellen Hanbidge, REALTORS
276 Merton Street
Toronto ON M4S 1N9
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